Central banks can introduce expansive monetary policies and lower the value of their currencies, but the biggest threat in the currency war has to be China, according to analysts.
In the eyes of Nicholas Ferres, investment director of Eastspring Investment, the big question is whether the People’s Bank of China (PBoC) will allow the yuan to depreciate or not, since it would mean exporting part of the country’s own deflation to the rest of the world and instigating concurring depreciation.
This year, no less than 24 central banks introduced expansive measures due to slow economic growth domestically and deflationary pressure. The oil price, which is at its lowest point in 6 years, is not helping.
The Chinese authorities are keeping the yuan in a tight trading range versus the dollar at the moment. The yuan only lost 0.9 percent of its value this year, while the dollar increased by 3.3 percent versus the Korean won and 4.3 percent versus the Singapore dollar.
The fact that the euro is down 12 percent for the year versus the greenback is probably putting more pressure on China to devalue the yuan, which would indicate that China is taking part in the currency war in the eyes of David Woo from Bank of America Merrill Lynch. In his view, this is the biggest tail risk of 2015.
The Currency War Is Far From Over
According to analysts the situation is becoming increasingly attractive for China to take action, now that the currencies of its two most important trading partners – the Eurozone and Japan – are much weaker.
The Japanese yen is down 11.5 percent versus the dollar since the Bank of Japan strengthened its QE program at the end of October. The growing Chinese deflationary risks and further depreciation of the euro and the yen could change China’s mind, said Woo.
If slow domestic growth will lead to a higher unemployment rate, Woo believes that the People’s Bank of China will eventually devalue its currency. He also added that he does not expect the currency war to end anytime soon in a world where growth and measures to empower growth are scarce.
